What Is Credit & Why Credit Is Important?

By Sa El

Credit expert, licensed Insurance agent, Real Estate agent, and Co-Founder of Credit Knocks

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What Is Credit?

Before I give you the textbook answer to this question, I want to give you the real world answer.

Credit is the gateway to your buying power, confidence, credibility, and adulthood; without credit, reaching your American Dream could seem like a distant fantasy.

I like to put things in “Plain English” as much as possible and will do my best to keep things simple.

If you type the word “credit” into google it will come back with the below definition: 

Credit - the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.

So, in "Plain English," credit is the ability to get something now, and pay for it later.

 If I give you some money and trust that you will pay me back in 30 days, I have just given you credit.

This is exactly what the credit grantors such as credit card companies and lenders are doing, for a fee.  

They are taking your word that if they give you access to a certain amount of credit, you will honor the agreement and pay it back plus any additional finance charges.

The Two Parts of Credit

When it comes to your credit you are going to be dealing with two different parts:

Credit Report

Your credit report is essentially the entire picture of what is on your “Credit,” it is like a report card of everything you have ever borrowed or any type of credit account you have opened.

The items on your credit report are what make up your credit score, which is the next part of your credit.

Credit Score

Your credit score is a number ranging from 300 to 950 (depending on the type of scoring system) that is assigned as a grade based on your overall credit report.

Credit Score Components by Percentage

The better your credit report, the higher your credit score will be, and of course, if your credit report has negative items on it, you will have a lower credit score.

The better your report and score are, the higher the ability you will be able to borrow from lenders and at a much more affordable rate.

There are also a few different types of credit you may encounter:

Revolving Credit

It is best to think of revolving credit as credit that you can keep using as long as you haven’t reached the maximum credit limit.

You can carry a balance as long as you are paying the monthly minimum required and as you pay the balance down, the amount of available credit increases.

Credit Cards, Lines of Credit, and Catalog Credit Accounts are all types of revolving credit.

For Example:

You have a Credit Card with a $500.00 maximum credit limit; if you spend $300.00, you will still have $200.00 remaining to spend.

However, if you pay the $300.00 back, your available credit will go back up to $500.00.

If you don’t have the $300.00 to pay back immediately, you are able to pay minimum monthly payments over time.

Buy-Here-Pay-Here Credit (Similar To A Store Credit)

You will usually experience buy here, pay here, credit when dealing with auto dealerships, this is credit the Dealership is giving to you, and you are paying them back directly.

Since you are paying them directly for their vehicle, this type of credit usually never reports to the 3 primary credit bureaus so it won’t help your credit.

If you are unable to pay; however, they will put something on your credit report known as a Collection, it’s best to stay away from this type of credit altogether.

For example:

You go to a car dealership, and you can’t get a loan from the bank, the dealership says, we can finance the car for you.  

They are taking on the financial risk because they are giving you the car in hopes that you will pay them back their money over time plus interest.

Charge Cards

Charge cards can get you into a ton of trouble if you don’t understand how they work.  

These cards require you to pay your balance in full every single month, unlike revolving credit, you don’t get the ability to pay over time.

For example:

You have a charge card with a $250.00 limit and a monthly due date on the 1st of every month.  

On January 1st you spend $200.00, you now have until February 1st when that $200.00 payment is going to be due, or the payment will be considered late.

There are very few credit cards that come as charge cards but always be sure to ask if you are unsure.

Installment Credit

With installment type of credit, you are issued a set amount of money that must be paid back in full.

What makes it an installment is that unlike revolving credit, you don’t have access to the funds once you pay them back, it’s a one time use.

You don’t have to pay it all back at one time, you are usually given set monthly payment amounts over time until the money is paid back.

For example: 

You get a personal loan for $500.00, you agree that you will pay it back over 12 months.

*You get a payment schedule of $42.00 per month and once you agree to the terms, the money is given to you, and the very next month you must start making your payments, regardless of what you do with the money.

*For the above example, we aren’t including any interest

Service Credit

Service credit is offered through different service providers, they check your credit to issue you things like a cell phone, a water bill, a light bill, rent payments, cable, pretty much all the services you pay every month.

However, until recently this type of credit was very one-sided because it didn’t report your on-time payments to the creditors.

It would usually only report to your credit if something terrible happened, for instance, if you were no longer able to make payment.

There are now products that give you the ability to have this type of credit count towards your total credit score.

Hopefully, I have been able to define credit transparently, now I want to explain why it is so important.

Why Is Credit Important? 

Having good credit is important because it is what you will need to navigate through the adult version of your life.

Before you turned 18, you probably never required credit; however, when you think about any part of your life, credit will become an important factor, such as:  


If you didn't know this, now you know, more and more employers are checking your credit history to determine if you can work for their company.

This is especially true for financial service businesses, they want to make sure you won’t make bad financial decisions, and they are going to use how you have treated your credit as an indication of how you deal with money overall.

They can also use your credit to see if you will make poor decisions because you need to get out of debt.

Remember that your credit report is also used to determine your character, if you live up to your agreements and if you are responsible and employers will take all of that into consideration, even more so if you have bad credit.

Buying Power

If your credit is good, your overall buying power changes, and the “cost of borrowing” completely goes down.

Things you probably would be afraid to think about buying before become much more affordable and your ability to purchase increases drastically.

It really isn’t fun finding yourself in a position where you make a nice monthly income, but not having good credit places you in a situation where you can’t buy the things you want.


Most property and casualty products will check your credit score and what is known as your insurance score before they will approve you or make a decision on how much your monthly premiums will be.


This means when you are applying for Renters Insurance, Homeowners Insurance, or Car Insurance, you can be sure that your credit profile will probably affect what your overall monthly premiums are going to be.

The better your credit score, and profile the lower your monthly premium, which means if you have a bad credit score, your premiums will be higher, costing you more money over time.

Buying A House

Owning a home is probably one of the most important reasons to have good credit.  

Just think about it, according to CNBC, the average cost of a home in the U.S. is around $200,000.

I don’t know about you, but unless you inherit a property and sell it online, coming up with $200,000 to pay for a home can be almost impossible.

However, if you have good credit, a bank won’t mind lending you that money that you can pay back over time.

Buying A Wedding Ring

Wedding rings are expensive, for me and my husband we were just able to get two gold bands, so the costs were minimal.

However, if you are looking to purchase a diamond ring, you are probably looking between $5,000 and $10,000 and that is just for the ring and the diamond.

It is much easier just to purchase this on credit and pay it back over time instead of paying the money up front and out of pocket.

Buying A Car

This is the same concept that we used for buying a house, we probably don’t have $25,000 sitting around to purchase that new Ford, Honda, or Toyota that you have been thinking about.

If you have good credit, you can get the lowest monthly premium and get a new car, even without having $25,000 in cash sitting in your bank.

Starting A Business

This is my favorite reason to have good credit because if you ever want to start a business, you will probably find it almost next to impossible to get financing. 

Most of our family isn’t going to understand why we are going into business and probably don’t have the income to support us anyway.

It is also an extra long process convincing a bank or event he SBA to give you a loan based solely on your idea.

It is much easier just to get approved for a credit card with a $10,000 limit to actually start your business than it is to get a loan for it.

Helpful Tip

Using your credit to actually create an income and generate money is a very smart move.

You are actually using your credit to be able to pay it back.

Paying For An Emergency

Most of us don’t have any $3,000 saved in our savings accounts, let alone an emergency fund.  

Just because you have credit, doesn’t mean you have to use it all at once and there is no better way to use it than for an emergency.

It gives you a 30-day window to figure things out if an emergency does happen.

Rewards Points

Reward points are my second favorite reason to have good credit, but I am sure it is my husband's number 1 reason. 

Whenever you use credit, you can gain rewards points or cash back, just for paying for things you were going to pay for anyway.

All the things we mentioned above can be used to pay for with credit and gain you rewards points that can be used for getting things like free flights on an airline, free night stays at a hotel, discounts on dining and clothing and almost anything you can think of.

Once you master rewards points, it will be hard to buy anything without first figuring out how to get points for doing it.

Taking Action & Next Steps

Like most people, I didn't grow up in a home that provided me with a credit education, and we didn't learn about credit or how to be financially responsible in school.

Usually our first time learning about credit is when we are in a situation where we need it, but don't have it.

Now that you have the basics and understand what credit is, you should take our Free 90 Day Credit Sprint Challenge.

You have done the right thing and started to take responsibility for your financial future, there is no reason to stop here.

Like most people, I didn't grow up in a home that provided me with a credit education, and we didn't learn about credit or how to be financially responsible in school.

Usually our first time learning about credit is when we are in a situation where we need it, but don't have it.

Now that you have the basics and understand what credit is, you should take our Free 90 Day Credit Sprint Challenge.

You have done the right thing and started to take responsibility for your financial future, there is no reason to stop here.

90 Day Credit Sprint for Bad Credit

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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